RBI’s Wilful Defaulter Circular Partially Unconstitutional!

The Wilful Default circular of the Reserve Bank of India is making news again! This time in a way that the RBI may not like. Today, the Gujarat High Court partially struck down RBI’s circular saying that it is unreasonable and arbitrary to the extent it paints all the Directors of a company with the same brush. CNBC-TV18’s Payaswini Upadhyay reports on the implications of this ruling.

Last year, Punjab National Bank sent a willful defaulter notice to Ionic Metalliks after having failed to recover its loan. Ionic Metalliks challenged the notice in the Gujarat HC on two grounds- one, that PNB failed to follow due process in serving this notice. On this ground, the Gujarat High Court has agreed with Ionic Metalliks and directed PNB to send another notice with material information in it. The second ground on which Ionic Metalliks went to the High Court was that the RBI’s Master Circular itself is not valid. The company made several arguments that RBI doesn’t have the power to penalize companies and that the circular doesn’t have statutory force etc. The High Court dismissed all the arguments of the company except one. The court said that the Circular is unreasonable and arbitrary to the extent it treats all the directors of a willful defaulter company in the same way. RBI’s circular says that the promoters, entrepreneurs and directors of a willful defaulter company cannot avail of bank capital for floating a new venture for a period of 5 years. Now the Gujarat High Court made a distinction between promoter directors vs nominee and independent directors of a company and said that the directors who are not involved in the day to day functioning of a company cannot be restricted to avail of bank capital for new ventures. And so, the court has held that this restriction on all directors is violative of their right to do business under the Constitution.

This obviously comes as a huge relief for nominee and independent directors of a company that gets tagged as a willful defaulter.

Two other important points. One, this judgment is based on the Master Circular and is independent of the changes announced by the RBI yesterday. Two, Finolex Industries is fighting a similar battle in the Bombay High Court. The hearings are set to commence next month and this Gujarat High Court order is likely to have a persuasive impact on Finolex’s case as well.